Bankrupt? Here's What to Do About It

How to rebuild your credit after financial disaster.

Personal bankruptcy may seem like the end of the world, but now many Americans are seeing the court-ordered detox of their finances as the only way to play the hand the recession has dealt them.

Bankruptcy filings for businesses and individuals increased 32% year-over-year in 2009 to 1.43 million, making last year the seventh worst year on record for filings, according to a recent survey by the Associated Press.

So you filed for bankruptcy. Maybe you went all in and filed for Chapter 7, where the government wipes clean most of your bill, but you lose almost everything. Or maybe you went the government-encouraged route of a Chapter 13, where only some assets are cleansed and you're put on a payment plan that allows you to keep key assets like your house or car.

But what comes after bankruptcy?

That all depends on exactly how you ended up on the bankruptcy road in the first place. Kelly Shelton of the nonprofit organization the Family Financial Education Foundation recommends taking a long look at what really led to your bankruptcy, be it medical bills, a job loss, divorce, or poor management of your finances.

"You need to take a deep look at whether or not this was something you could have prevented or if these outside factors and forces were just too strong," says Shelton. "This is the best time for people to take stock of their lives and see if there are things that need to be corrected. This is probably one of the most humbling times in a person's life."

Shelton says not to blame yourself, even if the bankruptcy filing resulted from maxing out your Visa (V) card. Instead, he recommends focusing on how to fix the problem and determining what you want to do with your future. A major part of moving forward will be setting long-term goals for you and your money -- like rebuilding credit, saving for retirement, paying for your children's education, or buying a house.

The first step toward those new long-term goals will be setting up a financial plan: Realistically calculate your income and take inventory of your expenses, dividing them up into necessary-fixed expenses (like rent), necessary-variable expenses (like utilities and food), and discretionary expenses (like cable or going to the movies). Shelton recommends finding a good financial consultant in your community that will help you set up a financial plan for free. He adds that it's important to start saving right away, even if it is only 10% of each pay check.

Steven Katz, senior director of the credit union TransUnion, says rebuilding your credit is most important, and the first step is to find out what is still on your credit report. AnnualCreditReport.com will give you all three credit reports for free, but each credit union charges a small fee of under $10 to see your credit score. Everything that was included in your bankruptcy will appear on your report for seven to 10 years, but it should have a $0 balance. (Be sure to contact the credit unions if there are any mistakes -- you'll have to take proactive steps to change these things.)

Rebuilding your credit score means having something that the credit unions can track. If you filed for a Chapter 13 bankruptcy, you might still have a mortgage or a car payment on which you can make timely payments, otherwise you might be able to obtain a letter from a landlord saying you've been making your rent payments on time for six to 18 months. In the current economic climate, it will take about that long before most creditors will feel comfortable giving you any lines of credit. If you aren't able to open a credit card, you can apply for a secured credit card that's backed by your savings account.

The most important rule of building new credit is paying off your new debt in full and on time. It's more likely you'll qualify for a car loan before a bank will clear you for a mortgage. It used to be about 18 months after a bankruptcy filing before any lender would seriously consider taking on the risky borrower. Nowadays, with banks like Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) enforcing stricter lending standards, it might make it even tougher for the recently bankrupt to get any sizable loan.

When you do, make your payments on time. Creditors will never give you a second chance if they think you're going to repeat your mistakes over again.

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